Retirement saving is a marathon, while saving for your children’s education is more like a sprint.
Managing a registered retirement savings plan requires strategizing over three or four decades, then pivoting into a registered retirement income fund that might easily run another 20 or 30 years. By contrast, parents managing a child’s registered education savings plan should start fast and aggressive in their investing, back off a little in high school, then jump right out of the stock and bond markets by age 18.
Here’s an RESP investing game plan using asset allocation exchange-traded funds, which are fully diversified portfolios of bonds and Canadian, U.S. and international stocks in a single low-cost product you buy and sell like a stock. Asset allocation ETFs are covered in depth in the latest Globe and Mail ETF Buyer’s Guide.
Your child is zero to 12 years old
With your child not likely to graduate from high school until age 18, it makes sense to consider an all-stock approach. Yes, there will be nasty corrections over the years, as well as strong returns. But the overall result should reward you for taking on risk with higher returns than portfolios with bonds mixed in. Consider an all-equity asset allocation fund, with holdings divided between the Canadian, U.S. and international stocks markets and, in some cases, emerging markets as well. If 100-per-cent equities sounds too bold, there’s a category of growth-oriented asset allocation ETFs with an 80/20 breakdown of stocks and bonds.
Your child is 12 to 16
Time to ease back on the risk of your child starting college or university and drawing down on an RESP that has lost some value in a stock market setback. Moving to a balanced asset allocation ETF with a 60/40 mix of stocks and bonds is one option, but you could also get more conservative with asset allocation funds holding a 40/60 mix. Bonds are the classic stock market hedge, but we’ve seen in recent years that they can damage your portfolio in periods of rising interest rates. If you want to avoid bonds in an RESP, you could pair guaranteed investment certificates with all-equity asset allocation ETFs in 60/40, 50/50 or 40/60 mixes.
Your child is 16 to 18+
There’s an argument for keeping some stock market exposure at this point to have some growth in the RESP over the four or more years your child is pursuing a postsecondary education. The counter-argument is that you have enough stress in your life without worrying about the impact of financial market volatility on your ability to cover your child’s tuition and any out-of-town living costs. Draining the risk from an RESP can be accomplished by putting the assets into a four-year ladder of GICs, which means four different certificates maturing in one, two, three and four years. The ideal maturity date is early to mid-August, in time to cover tuition bills. GIC alternatives include T-bill ETFs, high-interest savings account ETFs and investment savings accounts. Returns on these products are close to 4 per cent today, but they’ll decline as the Bank of Canada continues to lower rates.